One of the most important important concepts in personal finance is to pay yourself first. Whilst this concept particular resonates with people who are self employed, many self employed people tend to glean over its importance. Self employed entrepreneurs usually find it difficult to get the balance right between withdrawing money from the business and paying themselves first and keeping the money in the business and helping it grow. But entrepreneurs need to pay themselves first as well in order to gain a sound financial footing and to build their personal wealth.
How much should you pay yourself when you’re self-employed?
A good rule of thumb that I have heard many times is:
For up to £250,000 in gross revenue, you should pay yourself 50% of what your online business earns.
So if your business is earning £2,000 per month, £1,000 should be going straight into your pocket as net personal income, and £1,000 should remain in the business to help it grow. This suggestion comes from the book Profit First, which is an essential read for anyone starting their own business of any kind.
The nice thing about online businesses is they have very low overheads compared to brick and mortar stores. You need virtually no equipment beyond a computer, you can work from anywhere which negates the need for capital expenditure in terms of office space, and most online tools are extremely affordable. However, as your business grows, costs tend to increase. The larger your email list and the larger your demands on the software you use to serve your audience, the more you’ll pay since these are often charged per subscriber. Likewise, as your reach grows, so does the expectation of quality and frequency of the content you produce, which means you’ll need to invest in professional cameras or design services.
One of the things I think holds a lot of bloggers or other online entrepreneurs back from growing their business is the hesitation or reluctance to invest in the tools they need to make it grow because these can end up costing hundreds or even thousands of dollars per month.
You need to remove the mental barriers that view £1,000 or £2,000 of monthly business expenses as costs that reduce your personal income and accept the reality that a six-figure online business will have multiple five-figures of annual base costs in order to run. This is why the 50% rule works so well: it allows you to pay yourself an amount proportional to your success, while still give you ample additional resources to reinvest in your business.